As Congress labored over the last 14 months to enact broad health care reform, U.S. businesses watched the struggle and waited to modify their benefits plans until the outcome was decided.
With President Barack Obama’s signing of the $940 billion health care overhaul on March 23, employers will now have to scramble to comply with provisions that go into effect for the 2011 plan year. Among them are requirements to cover employees’ adult children up to age 26 and remove lifetime dollar limits on coverage.
The health care package will extend coverage to about 32 million Americans who currently lack insurance, with the government providing subsidies to those who can’t afford it.
Companies dodged the more stringent employer mandate contained in the House bill when the House approved the Senate version of reform on March 21.
The Senate bill penalizes employers who don’t offer coverage and whose employees must use federal subsidies to buy insurance on state exchanges. It does not, however, force employers to offer their own plans.
Nonetheless, the final bill, which ran about 2,800 pages, contains numerous provisions that companies must now digest as they design their 2011 benefits.
“They’re probably feeling about three months behind right now,” says Anne Crumlish, a senior consultant at Hewitt Associates in Atlanta. “Employers are going to have to buckle down and very quickly go through a strategic planning process.”
As they sort through the complex health care legislation, companies have to determine how the benefits they offer stack up against congressional requirements.
“Just the process of determining where they are is going to be a significant challenge,” says Marisa Milton, vice president for health care policy and government relations at the HR Policy Association in Washington. “People are just now getting a grip on what they need to be prepared for in coming months.”
The health care reform provision that has generated the most corporate reaction so far is one that will not go into effect until 2013. At that time, companies will no longer be allowed a tax deduction for subsidies they receive to provide drug coverage to Medicare-eligible retirees.
The subsidy was created as part of Medicare reform in 2003 and is currently used by about 3,500 employers, according to a report by Towers Watson. The consulting firm estimates that removing the subsidy, which amounts to about $665 per retiree, will cost companies about $14 billion.
Accounting rules require that the future loss be recorded in first-quarter statements this year. Several companies already have announced that they will take substantial charges—AT&T ($1 billion), John Deere ($150 million), Caterpillar ($100 million) and 3M (about $90 million).
Towers Watson says that the elimination of the subsidy will encourage employers to drop prescription coverage for their Medicare-eligible population.
“Retirees would be forced out of relatively generous employer plans into less generous commercial Medicare Part D plans,” Towers Watson wrote in a March 12 statement. “Medicare costs would rise as millions of additional retirees enroll in commercial prescription drug plans.”
Other immediate benefits changes ushered in by health care reform will be less dramatic but have the potential to impose higher costs on employers. Removing the lifetime benefits cap could make insurance coverage a riskier proposition.
Companies are “going to face more volatility in their claims experience,” Crumlish says. “They won’t be able to limit their exposure to high-cost claims.”
Large corporations, though, tend not to have lifetime limits on their plans. “The impact of this cost-wise is more likely to fall on small to medium-size employers,” says Greg Robertson, a partner at Hunton and Williams in Richmond, Virginia.
Another change that will go into effect on January 1 involves the purchase of over-the-counter drugs. Such non-prescription transactions will no longer be reimbursed through flexible spending accounts, health reimbursement arrangements or health spending accounts.
Robertson projects that the change will cause employees to put less money in such plans, which will result in higher taxable income for employees and higher payroll taxes for their employers.
Other provisions that will go into effect on January 1 will require changes in the way the companies determine eligibility, enroll employees and report information about their plans.
For instance, they must establish an internal appeals process and disclose on W-2 forms the total value of each employee’s coverage.
“From an administrative perspective, it will mean more work,” says Tracy Watts, a partner at consulting firm Mercer in Washington.
House Democrats who stepped up to secure a health-care-reform victory on March 21—by a 219-212 vote, just barely beyond the 216 votes required—are pointing to another immediate effect of the package for political cover: Insurance companies will no longer be able to deny coverage to anyone who has a pre-existing condition.
That might help House members who are up for re-election in November, but it will cost companies, according to a leading business organization.
“Restriction and mandates on insurance plans that employers now offer to workers—such as covering children under the family plan until age 26 and ending disqualifying factors such as pre-existing conditions—probably sound reasonable to many Americans,” U.S. Chamber of Commerce president Tom Donohue wrote in a March 29 letter to chamber board members. “But they unquestionably will drive up premiums even more.”
The health care bill has split the business community. Helen Darling, president of the National Business Group on Health in Washington, had a generally favorable reaction to the final measure that Obama signed.
“It’s a much better bill than would have come out of the House,” Darling says. “It’s probably as centrist a bill as employers could get. Adjustments made it much more reasonable, especially in the short term.”
More onerous provisions have been pushed off for several years.
Beginning in 2014, companies with more than 50 employees must provide health insurance that pays for at least 60 percent of benefits covered by the plan, with an employee’s contribution being less than 9.8 percent of household income. Most large employers currently exceed that threshold, even with high-deductible consumer-directed offerings.
Companies that don’t offer insurance will be penalized $2,000 annually for each employee who requires government assistance to purchase a plan on a state exchange. A company’s first 30 full-time workers are exempted.
Another provision that makes employers wince will start in 2018, when a 40 percent excise tax will be imposed on coverage that exceeds $10,200 for individuals and $27,500 for families.
Some of the provisions that go into effect later could provide momentum to efforts employers have made to curb health care spending. For instance, in 2014, wellness incentives can increase from 20 percent to 30 percent or more of a plan’s premium.
“We will see employers use more incentives to drive healthy behaviors,” Watts says.
Although the focus on wellness could save companies money, the health care reform measure does not do enough to lower medical costs, according to experts.
The bill provides subsidies to people with household income of up to 400 percent of the federal poverty level and expands Medicaid to include those who make up to 133 percent.
Medicare will be cut to fund such growth. The moves could lead to the private sector picking up more of the health care tab.
“The main thing is going to be cost shifting,” Milton says.
The coverage expansion will occur in a system that continues to pay for quantity rather than quality of service and is riddled with waste and overuse, Darling says.
“We have to find a way quickly to put the brakes on cost increases, as we bring new people in,” Darling says. “There is no payment reform. There are no controls on what gets paid for.”
Darling and other advocates will have a chance to shape the behemoth measure as the guidelines and rules that implement it are written during the next few years. Bills that are only a couple dozen pages in length can produce hundreds of pages of regulations. It’s hard to tell how many a 2,800-page bill will create.
“For employers, the impact of the regulatory process will be huge,” says Ron Chapman Jr., a shareholder at Ogletree Deakins in Dallas. “Virtually all the important terms that trigger or define the employer mandate will be fleshed out in the regulatory process.”
Disappointed in the outcome of health care reform on Capitol Hill, the U.S. Chamber of Commerce will try to exert its influence during rule making.
“We will be submitting comments, proposing language and seeking changes in an effort to minimize the potentially harmful impacts of this bill on our members and the country,” Donohue wrote to the organization’s board.
While health care policy evolves in Washington, health care coverage may decline in the private sector as companies become frustrated with the technicalities of reform.
“You may find employers not offering health care plans at all, but paying the penalty and letting their employees get their insurance on the exchange,” Robertson says.
They might also play down health care as a recruiting incentive.
“Some employers will view this as an opportunity to move toward the minimum rather than have health care benefits be a differentiator for them,” Watts says. “They may focus more on things such as wellness programs as a differentiator.”
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